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UAE’s banking pulse Q3 2021 shows preference for profitability over growth

Global professional services firm Alvarez & Marsal (A&M) recently released its latest UAE Banking Pulse for Q3 2021. The report indicates that while balance sheet growth slowed down, there was a sharp rise in earnings

The cost to income (C/I) ratio decreased to its lowest level since 2018 to 31.8% Net Interest Margin (NIM) increased by ~10 bps QoQ to 2.15% with higher yields on loans (+24bps QoQ) There was strong operating income growth, with 7.4% QoQ in Q3 2021

Global professional services firm Alvarez & Marsal (A&M) recently released its latest UAE Banking Pulse for Q3 2021. The report indicates that while balance sheet growth slowed down, there was a sharp rise in earnings indicating that banks are prioritizing profitability over growth.  

The report analyzed the 10 largest listed banks and was co-authored by Asad Ahmed, Managing Director and Head of Middle East Financial Services, and Sumit Mittal, Senior Director at Alvarez & Marsal.

The cost to income (C/I) ratio decreased to its lowest level since 2018 to 31.8% as banks continue to optimize their expenses and overheads.  In Q3 2021, operating income increased by 7.4% quarter-on-quarter (QoQ), driven by 6.8% QoQ growth in net interest income (NII) along with 8.5% increase in net fee, commission, and other operating income.

The report noted that Net Interest Margin (NIM) increased by ~10 bps QoQ to 2.15% with higher yields on loans (+24bps QoQ). However, the current NIM levels of 215bps are still below the pre-pandemic levels (260bps in 2019). The aggregate interest income increased 6.1% QoQ, primarily driven by an increase in yields to 5.3%.

The prevailing trends identified for Q3 2021 are as follows:

1- Loans & advances (L&A) grew marginally by 0.6%, while deposits growth kept pace with last quarter’s growth of 2.1% QoQ. Deposit growth kept pace with the Q2 level of 2.1% QoQ. Loans to Deposits Ratio (LDR) decreased marginally across the sector.

2- There was strong operating income growth, with 7.4% QoQ in Q3 2021, driven by an increase in NII of +6.8% QoQ and other operating income of +25.4% QoQ. However, this growth was partially offset by a 7% QoQ decrease in net fee and commission income. First Abu Dhabi Bank (FAB) (+23.5% QoQ) reported the highest increase in operating income, driven by 12.1% QoQ increase in NII, alongside investment and property-related gains.

3- While NIM expanded by 10 bps QoQ to reach 2.2%, supported by higher asset yields, it remains below pre-pandemic 2019 NIM average of 2.6%. The yield on credit increased by 24.0 bps QoQ to 5.3%, while the cost of funds remained flat QoQ at 1.1%. NIMs expanded across the board, though ADCB witnessed a decline of 22 bps QoQ driven by a decline in asset yields.

 

4- Operating efficiency improved as operating income grew twice as fast as costs. Cost-to-income (C/I) ratio improved by 117 bps QoQ to 31.8% in Q3 2021, its lowest level since 2018. Five of the top 10 banks witnessed an overall improvement in the C/I ratio. 

5- The asset quality remained stable in Q3 2021 with steady coverage ratios. The aggregate coverage ratio was mostly flat at 92.2%, while the aggregate non-performing loans (NPL)/net loan ratio remained flat at 6.2%.

6- Total net profit for the banks increased by 14.4% QoQ due to a rise in NII of 6.8% QoQ, a significant rise in other operating income of 25.4% QoQ. Consequently, profitability metrics such as Return on Equity (RoE) at 12.3% and Return on Assets (RoA) at 1.4% increased. FAB with 15.6% and DIB with 14.9% reported the highest RoE among the top ten banks.

Ahmed commented: “This quarter saw better-than-expected profits. However, the growth in profitability appears uneven and is leaning more towards the larger banks than the mid-sized banks.

Sound capital buffers, a stable funding profile, and expected government support should continue to uphold banks’ creditworthiness. However, asset quality may deteriorate over the medium term as forbearance measures are gradually withdrawn.”